Capitalising is popular around these parts and for good reason in a bull run.

I'm more conservative than others in this respect though, and pre-pay for 12 months each June (end of FY).

This allows me to get a small deduction in interest cost, and claim it against income immediately effectively.

Then when growth occurs to my portfolio during the year I tap into this equity by buying more shares or units.

The only thing is that each year the money I need to save to pre-pay the interest has increased quite a lot, so it's becoming a savings challenge. I could always get my distributions in cash but I'd rather not at this stage if I can help it.

Capitalising is popular around these parts and for good reason in a bull run.

I'm more conservative than others in this respect though, and pre-pay for 12 months each June (end of FY).

This allows me to get a small deduction in interest cost, and claim it against income immediately effectively.

Then when growth occurs to my portfolio during the year I tap into this equity by buying more shares or units.

The only thing is that each year the money I need to save to pre-pay the interest has increased quite a lot, so it's becoming a savings challenge. I could always get my distributions in cash but I'd rather not at this stage if I can help it.

Click to expand...

Hi Glebe, I'm trying to understand the differences (pros and cons), between capitalising the interest or prepaying it in advance but, using funds from the marging loan.
Thanks,
artgul

I have gone capitalised and with the bumpy ride that was March this is the first month that I have had to pay interest as I was mostly holding and not trading. I also found out I now get a discount of 0.25% from the standard rate which most likely is from holding their shares. It also lets me grow without the interest playing such a big part being upfront.

All I could find was this in the FAQ.

Q. Does St.George offer any benefits to Shareholders?
A. St.George offers benefits to shareholders by way of dividends.On occasion, we do make special offers to our shareholders. If special offers are made, it would generally be when we make our dividend payments.

You can capitalise the interest & still claim that interest against your income in your tax return, which can be quiet beneficial.
Although I would only do that if I was reinvesting, or at least, reinvesting 50% of the distributions to keep the LVR in check.
And that is while we are enjoying such favourable market condition, strategy may need to change if (& when) the market conditions change (& they will).

Edit:
I should have also mentioned that by capatalising you interest, your debt will get higher but as long as your keeping your LVR to a managable rate (say 50% to be conservative), the growth in your funds will well compensate for that increase in debt.
(Read some of Sims earlier threads on managed funds).